The opinion of the court was delivered by: Hon. Glenn T. Suddaby, United States District Judge
MEMORANDUM-DECISION and ORDER
Currently pending, in this breach-of-contract action filed by Perceptron, Inc. ("Plaintiff") against Silicon Video, Inc., and Panavision Imaging, LLC ("Defendants"), are the following: (1) Defendant Panavision Imaging, LLC's motion for summary judgment (Dkt. No. 111); (2) Defendant Silicon Video, Inc.'s motion for summary judgment (Dkt. No. 114); (3) Plaintiff's motion for summary judgment (Dkt. No. 134); and (4) Plaintiff's motion to dismiss Defendants' affirmative defenses/counterclaims (Dkt. No. 110). For the reasons set forth below, Defendant Panavision Imaging, LLC's motion for summary judgment is granted; Defendant Silicon Video, Inc.'s motion for summary judgment is denied; Plaintiff's motion for summary judgment is granted in part and denied in part; and Plaintiff's motion to dismiss Defendants' affirmative defenses/counterclaims is granted in part and denied in part as moot.
Generally, in its Complaint, Plaintiff seeks a judgment declaring the rights of the parties with regard to the successor liability of Defendants for an arbitration award granted against non-party Photo Vision Systems, Inc. ("PVS") in favor of Plaintiff in the amount of $2,870,897.43 plus interest. (See generally Dkt. No. 2, Attach. 1, at 8-15 [Plf.'s Compl.].) More specifically, Plaintiff alleges that, after PVS breached a contract with Plaintiff in April 2002, but before Plaintiff obtained an arbitration award against PVS on March 24, 2004, PVS transferred its assets to Defendant Silicon Video, Inc. ("SVI"), which in turn transferred those assets to Defendant Panavision Imaging, LLC ("Panavision"). (Id.)
B. Defendants' Counterclaim
In their jointly-filed Answer, Defendants assert one affirmative defense/counterclaim to set aside the default arbitration award, "re-open" the arbitration, and permit any Defendant having successor liability for the default arbitration award the right to interpose a re-hearing of the arbitration, and present all available defenses, claims and counterclaims. (Dkt. No. 17.)
C. Decision and Order of August 27, 2010
On March 22, 2007, Plaintiff filed its first motion for summary judgment. (Dkt. No. 43.) On May 4, 2007, Defendant SVI and Defendant Panavision jointly filed a cross-motion for summary judgment. (Dkt. No. 52.) On August 27, 2010, this Court issued a Decision and Order ("August 2010 Order") denying Plaintiff's motion and Defendants' cross-motion for summary judgment without prejudice. (Dkt. No. 61.) In doing so, the Court concluded as follows: (1) "sufficient record evidence exists from which a rational factfinder could conclude that a genuine issue of material fact exists regarding whether Defendants are liable to Plaintiff for breach of contract under a 'de facto merger' theory of successor liability"; (2) based on the then-current record, "a genuine issue of material fact exist[ed] regarding whether Defendants possessed sufficient knowledge of Plaintiff's claim when PVS's assets were transferred in March 2003." (Id.) In addition, the Court rejected Defendants' other two arguments against successor liability
(i.e., that Plaintiff did not experience a loss or reduction of its position following the transfer of PVS's assets to SVI, and the subsequent transfer of those assets to Defendant Panavision, and that, in transferring PVS's assets, Defendants followed the loan, security and statutory foreclosure process under New York Uniform Commercial Code § 9-620). (Id.)
D. Undisputed Material Facts on Parties' Current Motions
Generally, the Court incorporates by reference the undisputed material facts set forth in the August 2010 Order to the extent those facts are not disputed by the record or the parties' current motions. In addition, the Court treats as undisputed the material facts asserted by the parties on their current motions and either expressly or effectively admitted by the non-movants pursuant to Local Rule 7.1(a)(3). (Dkt. No. 114 [Def. SVI's Rule 7.1 Statement];Dkt. No. 116 [Def. Panavision's Rule 7.1 Statement];Dkt. No. 135 [Plf.'s Rule 7.1 Statement]; Dkt. No. 159 [Plf.'s Rule 7.1 Response to Def. SVI's Rule 7.1 Statement];Dkt. No. 179 [Plf.'s Rule 7.1 Response to Def. Panavision's Rule 7.1 Statement]; Dkt. No. 163 [Def. Panavision's Rule 7.1 Response to Plf.'s Rule 7.1 Statement];Dkt. No. 165 [Def. SVI's Rule 7.1 Response to Plf.'s Rule 7.1 Statement].) The following is a recitation of those undisputed material facts.
1. PVS's Agreement with Plaintiff
PVS was founded in 1997 to develop advanced electronic designs and products. In 1998, PVS entered into a License and Development Agreement with Plaintiff. Between 1998 and 2002, Plaintiff paid PVS $550,400, pursuant to the License and Development Agreement, and in return received designs, prototypes, test data and other contract deliverables from PVS. On April 17, 2002, Plaintiff sent a letter to Jeffrey Zarnowski, one of the founders of PVS, advising PVS that "it was terminating its contract with PVS because PVS had breached the contract."
On May 6, 2002, Plaintiff's CEO, Al Pease, sent a second letter to Jeffrey Zarnowski, reiterating Plaintiff's opinion that PVS had breached its contract with Plaintiff, and stating that Plaintiff had suffered substantial losses due to PVS's breach. The letter further advised Jeffrey Zarnowski that, although Plaintiff would prefer to avoid costly litigation, Plaintiff's board had urged the company "to pursue recovery of our losses." On May 20, 2002, Jeffrey Zarnowski acknowledged receipt of both the April 17 and May 6 letters.
On June 11, 2002, Pease sent a third letter to PVS's CEO, Thomas Vogelsong, demanding PVS's immediate return of the $550,440 already paid by Plaintiff to PVS under the License and Development Agreement. Pease further advised that, "if the matter goes to arbitration and/or litigation [Plaintiff] will seek monetary damages that will include, in addition to the amounts already paid to PVS under the Agreement, more than $2.3 million in documented costs incurred by [Plaintiff] on the CMOS Imager Project as a direct result of promises made by PVS and subsequently wasted because of the failure of PVS to meet its contractual obligations." The letter also advised that, "[i]f we do not achieve an amicable settlement on or before June 18, 2002, [Plaintiff] will have no choice but to pursue its legal remedies."
On June 24, 2002, Pease sent a letter to Vogelsong and Jeffrey Zarnowski, discussing a visit that occurred at Plaintiff's business on June 18, 2002, in which discussions were held about "solutions to avoid litigation." On July 25, 2002, Zarnowski sent a letter to Pease, in which he stated as follows: "Upon acceptance of either PVS proposal, each party will exchange mutual general releases and neither party will have any rights, liabilities or obligations to the other under the Agreement, except for obligations arising under Sections 6 and 7 of the Agreement." Zarnowski further advised that, if no agreement was reached, "each party shall be entitled to pursue whatever rights and remedies it may have against the other."
2. PVS's Loan from Lenders
At approximately this same time, in an effort to raise capital, PVS authorized the sale of preferred stock to its stockholders and potential investors. The Cayuga Venture Fund, II, LLC ("CVF") conducted an independent due diligence inquiry about PVS that included review of PVS's financial statements, intellectual property, contracts, tangible assets, and other matters. In that due diligence process, PVS disclosed its dispute with Plaintiff.
On September 23, 2002, PVS entered into a "Security Agreement" with CVF and certain other investors ("the Lenders"), pursuant to which PVS purported to grant the Lenders a first perfected security interest in all of PVS's assets, along with reserved rights to convert the debt to equity, in exchange for bridge loans through which PVS could borrow up to $1,750,000. Three of the Lenders were PVS stockholders. The loans were documented by promissory notes and security agreements; and UCC and U.S. Patent and Trademark notices were filed.
On December 2, 2002, Jennifer Tegan of CVF sent an email message to Thomas Vogelsong, in which she inquired about the "Current Status of the dispute with [Plaintiff]." In a response email message, Vogelsong indicated that Plaintiff "had notified PVS in April 2002 of their intent to terminate the License and Development Agreement due to delays in delivery of the ACS-1k product." Vogelsong further acknowledged that PVS had been paid "approximately $520,000 for development work under the contract."
On February 25, 2003, CVF, on behalf of itself and the Lenders, issued a Notice of Default to PVS for failure to make payments in accordance with the Security Agreement. In an email message sent to Thomas Vogelsong and Jeffrey Zarnowski on February 26, 2003, a CVF principal, David Ahlers, discussed the need to "develop a strategy to maximize the sales price [of PVS]." In addition, Ahlers advised Vogelsong and Zarnowski about the "next steps for PVS," which involved a "creditors negotiation strategy" and "[f]rank and open discussion with all the players involved if we have any chance to pull this out of the fire." In an email message sent to Vogelsong and Zarnowski on February 28, 2003, Ahlers expressed his opinion that there was "a realistic chance [of selling] a reconstituted PVS . . . to Pixim[,]" a third party.
On March 2, 2003, Vogelsong and Jeffrey Zarnowski prepared a "Business Strategy" document for Ahlers, Phil Projanski and Hank Watson, which provided a strategy to "Position [PVS] for Investment/Acquisition at Minimum Burn Rate." The first sentence in the document stated as follows: "[g]iven our present condition, we must drastically reduce our expenses and maximize potential near term revenue, while preserving/creating a company which can attract the interest of investors or acquirers."
On March 6, 2003, Ahlers sent an email message to Projanski, Watson and Tegan, in which he stated that "a disaster [with regard to the sale of PVS] could easily effect our preferred employee relationships and the value of our security." In addition, Ahlers stated in the email message that he "feels [CVF is] caught between counsel's legal advice during this period and sound business practice, where almost any action in line with one violates the other." That same day, PVS received notice from Plaintiff that it would file for arbitration "[i]f, within one week from the date of this letter, [the parties did not] come to terms . . . acceptable for [Plaintiff] and that g[a]ve [Plaintiff] confidence of continued support . . . ."
On March 11, 2003, Ahlers sent an email message to Tegan and Watson, with a subject line entitled, "Clean start PVS -- no creditor payments." In the email message, Ahlers set forth three scenarios for the future of PVS, all of which were premised on the assumption that "all creditors are trashed."
On March 13, 2003, CVF provided a bridge loan to PVS to "meet payroll -- maintain core staff." On March 15, 2003, CVF formed SVI.
3. Transfer of Assets from PVS to SVI
On March 27, 2003, following PVS's default on its loan from the Lenders, PVS's assets were transferred to Defendant SVI. These assets included PVS's trademarks, copyrights, goodwill, and accounts receivable. Immediately upon the transfer, PVS ceased its ordinary business.
Following the transfer, SVI set aside twenty-five percent (25%) of its stock for key employees, certain critical creditors and SVI Board discretion. In addition, SVI hired Jeffrey Zarnowski to serve as the company's CEO, and provided him with a cash bonus, a salary, and other benefits, including 9.92% ownership in the company, which made him the largest individual shareholder. SVI also hired Jeffrey Zarnowski's wife, Dawn Zarnowski, to serve as the company's office manager, a role she had performed for PVS, and his brother, Terry Zarnowski, to serve as the company's chief marketing officer. SVI provided Dawn and Terry cash, a salary, and other benefits, including company stock, of which Dawn received 0.10% and Terry received 0.53%. SVI hired four other former PVS employees, including Michael Joyner, Ketan Karia, and Mike Sullivan. In addition to their salaries, SVI provided Joyner 2.50% in company, Karia 2.10% in company stock, and Sullivan 0.30% in company stock. In addition, SVI provided PVS's CEO, Thomas Vogelsong, capital stock in SVI.
Subsequently, certain companies that were owed money by PVS, including Plaintiff, contacted SVI in an attempt to collect on PVS's obligations to them. SVI advised these companies that SVI would not pay PVS's debts. However, SVI paid some vendors to whom PVS owed money, in order to induce them to do business with SVI.*fn1 In addition, the Lenders invested a total $516,436 in Defendant SVI in order to keep Defendant SVI in business.
4. Sale of SVI to Panavision, and Plaintiff's Arbitration Proceeding with PVS
Shortly after the transaction between PVS and SVI, the Lenders made efforts to find purchasers for SVI. SVI contacted various companies, including Panavision, regarding the potential acquisition of SVI's assets.
On July 2, 2003, Panavision executed a Mutual Non-Disclosure Agreement with SVI in order to obtain more information about the assets for sale. Subsequently, Panavision conducted due diligence into the possible acquisition of the CMOS image technology and other assets owned by SVI.
On July 8, 2003, Plaintiff filed a demand for arbitration regarding PVS's alleged breach of contract. Plaintiff served the demands on PVS and SVI, contending that PVS had breached and SVI had successor liability for the breach. PVS did not respond to the arbitration demand. At some point between August 7 and 20, 2003, SVI objected to the demand on the ground that it was not a party to the contract, and threatened to seek a stay of arbitration. On or about August 20, 2003, Plaintiff voluntarily discontinued the arbitration against SVI.
On or about October 2, 2003, Panavision made an initial written offer to purchase the assets of SVI. On October 8, 2003, Panavision made a revised written offer. The revised written offer proposed a transaction in the form of an asset purchase and consisted essentially of a $2,000,000 purchase price plus an "earn-out" of not less than $500,000 based on future revenues generated from assets after the closing of the transaction.
On October 10, 2003, SVI accepted Panavision's purchase offer. Panavision then conducted a thorough due diligence of SVI's assets. Panavision provided SVI with a document request list. Panavision's requests sought information about, among other things, SVI's assets, intellectual property, contracts, licenses and customers, as well as SVI's predecessor, PVS, and the foreclosure transaction. Subsequently, SVI set up a "data room" filled with documents and information for review by Panavision and its attorneys. Eric Golden, then Senior Vice President of Panavision, went to Homer, New York, on October 21, 2003. For two days, Golden personally reviewed information in the data room, and conducted meetings with SVI personnel. At some point at or around the time of these meetings, SVI personnel informed Golden that Plaintiff had commenced an arbitration proceeding against PVS and SVI in July 2003, and that SVI had been dismissed from that arbitration proceeding without prejudice. In addition, SVI personnel provided Golden with documents relating to the foreclosure, Plaintiff, and the arbitration proceeding in the data room.
While SVI was in negotiations with Panavision, Plaintiff proceeded with its arbitration proceeding against PVS.
On December 15, 2003, Panavision purchased substantially all of the assets of SVI pursuant to a written asset purchase agreement. In exchange for its assets, SVI received a cash payment of approximately $2,000,000, with an opportunity for no less than $500,000 of additional consideration over the next several years in the form of earn-out payments. Panavision did not contractually assume any liabilities of either SVI or PVS with respect to Plaintiff. After the completion of the asset purchase, certain employees of SVI went to work for Panavision, including Jeffrey Zarnowski (who was hired as a member of Panavision's management team), and Dawn Zarnowski (who was hired as an office manager).
Following the asset purchase, SVI ceased regular operations, but continued to receive "earnout" payments for several years. PVS formally dissolved in December 2003.
On March 24, 2004, the arbitrator issued an award in favor of Plaintiff in the full amount claimed of $2,870,897.43. Subsequently, Plaintiff filed a Complaint for Entry of Judgment Based Upon Arbitration Award against PVS in Wayne County Circuit Court, and a motion to ...